Income-Producing Properties: What You Need to Know

Two specialists from Wells Fargo Private Bank's Real Estate Asset Management group explain using real estate to produce reliable long-term income.

Image shows a row of brightly painted three-story homes to represent one type of income-producing property

Income-producing property can have an important place in a diversified portfolio. But this option sometimes may be overlooked.

Real estate bought for the rental income or appreciation potential can be a smart option with respect to other investment classes. “Their movements are not as correlated to the stock market as other investment classes,” explains Adam Doud, Vice President–Real Estate Advisory Specialist, Wells Fargo Private Bank’s Real Estate Asset Management group.

Here are some considerations to keep in mind when investigating income-producing property.

1. Plan for the long-term.

Income-producing property is essentially an illiquid asset. For example, the sales process for an apartment building can take three to six months (you may be able to sell more quickly if you compromise on price, though that will hurt your potential return).

Matthew Kot, a Vice President–Real Estate Investment Consultant with Wells Fargo Private Bank’s Real Estate Asset Management group, uses a baseball analogy with his clients. “For these properties, our goal is to play small ball. Doubles—striving for steady income and modest gains—are great. We typically don’t bat for home runs, since that can mean lots of strikeouts, too.”

Income-producing property—real estate bought for the rental income or appreciation potential—can have an important place in a diversified portfolio.

2. Start with an open mind.

Many potential buyers prematurely form ideas about what to buy. Some clients initially limit themselves to communities or property types they’re familiar with, but that may not be the appropriate choice. “We think it’s best to keep emotions out of the selection,” Kot says.

Instead, he recommends relying on professional analysis to find an opportunity that matches your goals. “Our team has decades of experience and the capabilities for in-depth analysis,” he says, “so we can find properties that precisely match our clients’ needs.”

“For example, one client started out wanting to purchase a medical office in Phoenix,” adds Doud. “Our analysis, tailored to many factors, recommended a North Carolina–based industrial space instead … and was better-suited to their goals and objectives.”

3. Research thoroughly—and get third-party help.

There’s much more to a property’s potential than how it looks on the outside. A building’s solid appearance can hide latent problems. Age and condition of a property matter to its quality as an investment, of course. “When you dig deep, you can find issues that will result in significant expenses in the future,” says Doud. Get a third-party inspector to check out any questionable aspects and look for problem areas.

You will likely want to consider the local job market, real-estate supply, relative market growth, leasing velocity, expenses, and other factors that can impact real-estate value and the potential return on your investment. “Our analysis gets extremely granular,” Doud says of the services offered by Wells Fargo Private Bank’s Real Estate Asset Management group. “To get a clear picture of expenses, for example, we may look at every expense line item for three years of ledgers.”

That sort of detailed examination helps purchasers make the best decisions possible. “At the end of the day, I want my clients to say they bought exactly what they thought they were buying—no surprises,” he says.

4. Use debt to potentially enhance returns.

Borrowing to invest in income-producing properties may serve to enhance your return. Of course, you will want to factor in the interest you pay on a loan like this when evaluating this scenario, but Kot finds this to be a viable route for certain clients to consider.

Michael W. Brough is a Texas-based writer whose work has appeared in The Wall Street Journal, The Washington Post, USA Today, and other outlets. Image by iStock

What can Wells Fargo do for you?

Investing in a business or commercial real estate requires a strategic approach. Let’s work together to create a plan that matches your vision.

There are special risks associated with an investment in real estate, including possible illiquidity of properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors is not a legal or tax advisor. Please consult with your tax and legal advisors to determine how this information may impact your own situation. Whether any planned tax result is realized by you depends on the specific facts of your situation at the time your taxes are prepared.

All loans are subject to credit approval. Real estate investments carry a certain degree of risk and may not be suitable for all investors.

This information is provided for educational and illustrative purposes only.

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